We already covered the how, who and when of calculating LTV (lifetime value). This post is about the Why. It should have probably been the first post as Simon Sinek famous saying “You should start with why”. Anyway, better late than never so here we are.
Companies calculate their user lifetime value as soon as they start ramping up their marketing efforts and especially if they need to raise money in order to do so.
Fundraising and LTV
One big reason to know your LTV is so that you can present to investors and appear on top of your game. Investors normally want you to have a grip of your KPIs since they want to know you are going to be smart about how you will spend their marketing dollars. The basic formula of user acquisition is that you want your CLV (Customer Lifetime Value) to be bigger than your CAC – Customer Acquisition Cost. This is not enough on it’s own but definitily the place to start – the most basic requirement. If you can show that you can consistently have CAC < CLV, investors would want to invest in your company.
Marketing – LTV by segment
The need to do grow via paid marketing is another big reason to start figuring out your LTV. This time you would want to figure out the LTV of specific segments. The basic formula of having the lifetime value exceed the customer acquisition costs still applies here but you should think about it per segment. In other words, you want to be able to calculate the value of each user so that you can find the segments with the high CLV which makes it easier to make the user acquisition formula (CLV > CAC) work. Alternatively you can try to figure out what channels are less expensive and figure out the user lifetime value of these channels and see if the formula works there.
Measureing lifetime value in order to improve it
The last reason to figure out your LTV is that you can improve it. The basic idea behind any analytics and measurement practice is that you can’t improve what you don’t measure. As you consider changes to your app or service you want to be able to A/B test or at least do cohort analysis on users that reached before and after a big change. The parameter you should consider is the user lifetime value – focus your optimization efforts on this parameter and try different things while keeping the changes that increase your LTV. This should help you reach a point where the user acquisition formula works and you can start growing fast.